Two important changes were announced in late 2011 that are likely to boost activity on the Johannesburg Stock Exchange (JSE): the reclassification of foreign-domiciled companies on the JSE as local listings and a cross-listing initiative with an alliance of exchanges from the Brazil-Russia-India-China-South Africa (BRICS) emerging market bloc. As these initiatives are carried out in 2012 and beyond, they are likely to increase the JSE’s connectivity with investors worldwide.
NEW LISTINGS: Since 2004, South Africa has allowed foreign companies to list on the JSE, which are commonly known as inward listings. There were many advantages of this new policy, and the most salient of them were outlined by the South African Reserve Bank in a 2004 circular: attracting foreign direct investment into the domestic economy, increasing the market capitalisation and liquidity of South Africa’s capital markets, supporting the New Partnership for Africa’s Development initiative and meeting the exchange control objectives of enhancing foreign investment diversification through domestic channels.
While these were admirable policy goals, in practice, not many firms took advantage of the new rules. In part this was because these listings were still considered foreign assets. For this reason, South Africa’s exchange-control rules limited the amount of these equities that local investors could hold, regulations that were known as the “prudential limits”. Moreover, with the exception of companies that were classified as African, these stocks could not be included in the JSE main index.
PROPOSALS FOR CHANGE: By early 2011, pressure was building for an alteration to the exchange-control rules as applied to inward listings, with the JSE seeking the removal of the prudential limits entirely, a move that would allow South African investors to invest in inwardly listed foreign companies just as they would in domestically domiciled ones. In February of that year the minister of finance, Pravin Gordhan, released a discussion paper outlining a number of possible models that fell short of a complete lifting of the limits. One proposal suggested that any future foreign listings would be subject to prudential limits, while prior listings and African companies would be exempted from them, while another proposal suggested that a category for non-resident companies be created, by which the stock of companies that have substantial operations in South Africa or elsewhere on the continent would be granted the same status as that of domestic companies.
NEW REGIME: However, the argument for a complete lifting of the prudential limits had won out by the end of the year, and in October 2011 the treasury announced that inward-listed companies on the JSE would no longer be classified as foreign holdings for institutional investors and that these listings would also be included in the JSE indices. The change was expected to improve the JSE’s position as a listing venue for foreign companies, especially for those organisations looking to expand into Africa.
The CEO of the JSE, Nicky Newton-King, spoke to OBG prior to the legal changes and underlined the significance of the development for trade in the country. “Our policy is to be the place where South Africans can trade anything they want, not only South African instruments,” she said. “As soon as you allow inward listings to trade using local money and sit in the indices, you immediately free up the options for South Africans to invest in them, and it becomes more attractive to international issuers because now they’ve got tracking funds following them, and so on.”
As of February 2012, 38 securities were inwardly listed on the JSE, with primary listings on a variety of bourses as diverse as the Toronto Stock Exchange, the Australian Securities Exchange and the London Stock Exchange – both on its main market and the popular Alternative Investments Market (AIM). Investors can now evaluate them entirely on merit rather than through the prism of regulatory issues, while offshore companies now have a greater incentive to list on the JSE and take advantage of South African capital. The process of doing so is similar to that of a primary listing, and if a company is already listed on an exchange that is a member of the World Federation of Exchanges (WFE), making a secondary listing on the JSE can be fast-tracked. Fund managers, meanwhile, are now able to re-designate funds previously earmarked for foreign asset exposure and invest them in the uniform and simplified securities market in Johannesburg.
EXCHANGE TIE-UP: This move towards a more liberal regulatory regime concerning South African investors’ exposure to foreign assets was augmented by a second development in 2011. In October, a number of BRICS exchanges announced a joint initiative with an aim of increasing the exposure of their domestic investors to each other’s markets. Participating in the first stage of the initiative alongside the JSE are Russia’s MICEX (currently merging with RTS Stock Exchange), Hong Kong Exchanges and Clearing (HKEx), and the BM&FBOVESPA from Brazil. The National Stock Exchange of India and the BSE (formerly the Bombay Stock Exchange) have both signed letters of support and indicated their intention to join the initiative on the finalisation of some outstanding requirements.
As of the end of June 2011, the BRICS exchanges had a combined market capitalisation of around $9.02trn and accounted for 18.1% of global exchange-listed derivative contracts traded by volume during the first six months of the year, according to the Futures Industry Association. The tie-up among these exchanges is also seen by some as a sign of the coming power that the BRICS bloc represents. “The alliance enables more investors to gain exposure to the BRICS bloc of emerging economies, with its increasing economic power. From a global perspective this alliance points to the growing relevance of the BRICS economies and financial markets in the coming decade and further underlines the reason for the BRICS relationship,” Ronald Arculli, the chairman of HKEx and the WFE, told the local press in October 2011.
IMPLEMENTATION: As part of the first phase of the programme, participating exchanges are cross-listing and offering in local currency equity index futures for each of the other exchanges. For example, an investor can purchase futures on the JSE Top 40 Index from the HKEx, while the JSE will host similar instruments from the other exchanges in the alliance. The participating exchanges started trading these futures on March 30, 2012, with the exception of the MICEX, which is delaying the introduction until May 2012.
At the time of the announcement of the cross-listings, Ruben Aganbegyan, the president of MICEX, told the press, “This initiative gives a lot of opportunities for growth and development as it will allow local investors to diversify and gain exposure to other emerging markets through a locally listed product. Cross-listing of benchmark equity index derivatives will facilitate liquidity growth in the BRICS markets and will considerably strengthen the international position of the BRICS alliance in the global economy.”
Initial trading of these futures was quite light, despite the fact that users are not being charged to trade these cross-listed indices for the first six months. Once fees are charged, half the revenue from trading futures based on another bourse’s index will be shared with the operator responsible for the index.
FUTURE PLANS: Following the successful completion of the first phase of the initiative, attention will turn to a second phase that will include the development of an index that combines exposure to the equity indices of all partner exchanges. This index will in turn be cross-listed and traded in local currencies and its formation will allow the creation of exchange-traded funds based on the index, which could be of more interest to investors than the futures currently listed.
The ultimate goal of the process, above the provision of investment opportunities across the BRICS network, is to aid the dissemination of new products through participating exchanges by which investors can play a part in the above-average growth predicted for these developing regions. According to the JSE, this cooperation may then be taken further to a third phase, which might include product development and cooperation in additional asset classes and services.
The multilateral BRICS initiative and the JSE’s inward listing reform represent elements of a broader move to enhance the global connectivity of South Africa’s capital markets. How this ambition will be realised – whether it is through the continued exploitation of network connectivity or via a more formalised route through a partnership with a larger global group – has yet to be determined. In the short term, however, industry watchers will be closely analysing the JSE’s efforts to bring in more investors to its floor.
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